A CFD gives the investor all the benefits of the underlying cash equity whilst avoiding many of the typical costs and problems associated with dealing in the physical share. They have been used for many years by institutions because they are an excellent vehicle for hedging existing holdings and for short term trading.

A CFD is an undated equity swap combining the borrowing of cash and the use of this cash to purchase shares.

The buyer of the CFD receives the performance associated with holding the share whilst paying the finance charge to the seller.

A CFD is a margined product, this means that the investor has only to deposit a percentage of the total cost of the trade, this is normally between 10% and 20%. This allows the investor to take a larger position, for a deal of $20,000 worth of shares the customer would only have to deposit
$4,000, if the margin requirement on that share is 20%. This has the effect of multiplying the rate of return on the trade.

If the customer made $1,000 on the trade this would be a 5% return if physical shares were used but 25% if a CFD was traded.

However, you should note that gearing also means that the potential for losses is equally increased.